A New Chapter in Transparency? Companies House’s New Powers to Tackle Economic Crime

A New Chapter in Transparency? Companies House’s New Powers to Tackle Economic Crime

18 Dec    Advice, Finance News, Legal

The Economic Crime and Corporate Transparency (ECCT) Act was passed in late October after years of public consultation on tackling economic crime, spurred on by Russia’s invasion of Ukraine.

The Act contains measures to stop criminals forming companies in the UK and using them for illegal purposes. It also gives new powers to Companies House in the fight against money laundering and fraud.

The ECCT Act represents a major shift in Companies House’s role. It changes it from a passive curator of the public Companies Register to an active watchman. It now has powers to police the Register to prevent inaccurate information from entering it and force those who control companies to formally identify themselves.

How effective the new laws will be in fighting economic crime will depend on how the government chooses to put them into action via secondary legislation. Much will also depend on how Companies House proceeds with the necessary systems development, process changes, recruitment and awareness-raising to allow it all to run smoothly.

John Korchak, Managing Director, Inform Direct a company secretarial and formation specialist explains parts of the Act that will most directly affect UK companies and how they are likely to work in practice.

Identity verification

When this is fully in force it will be built into the company formation process so as to make it impossible to incorporate (form a company) without formally identifying its company officers and PSCs (persons with significant control).

Identity verification will be carried out directly with Companies House or through a new type of intermediary called an Authorised Company Services Provider (ACSP). Both routes will carry an equal level of assurance because ACSPs will be agents such as company formations, tax, legal or accounting professionals who already conduct due diligence checks on clients as part of their duties. They will themselves be identity checked and registered with a supervisory body for anti-money laundering (AML).

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Verification will take place through a third party provider of identity document validation technology such as the ones already in use in banks and other financial institutions.

As far as possible, the government aims to make identity verification a one-off event for each individual director or PSC. In theory at least, once a person gains verified status they can occupy positions in various companies without having to be ID checked separately for each appointment.

Existing companies’ officers and PSCs will have to go through this process too, or risk having an ‘unverified’ flag against their company on the public register. Identity verification is also likely to be extended to limited liability partnerships (LLPs).

Changes to Companies House accounts filing

Small and micro-entity companies will have to file fuller accounts. In the consultation phase leading up to the ECCT Act, it was argued that the minimal amount of financial information these companies are currently required to expose on the public register does not justify the benefits of limited liability. To earn that right, small companies including micro-entities will soon have to file a profit and loss account as well as a balance sheet. This makes it harder for money launderers to conceal the flow of funds through their companies. However, it will also cause concern among law-abiding companies because it means disclosing their turnover and profitability, commercially sensitive figures that many small businesses are not used to revealing.

Companies House is also committed to moving to software-only accounts filing. This means that many small and micro companies will have to source accounting software that meets certain requirements, such as full iXBRL tagging. Other existing routes for filing accounts, such as Companies House’s online service (WebFiling) and paper filing, will be phased out in favour of software packages. These accounts filing changes will take many months to come into force, which does leave time to find suitable software.

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More information required about shareholders

The Act will require companies to record more information about their shareholders. The register of members, where shareholder information is recorded, will have to include full names (full first names rather than initials) and service addresses. It will also be required (eventually, likely via secondary legislation) to disclose whether any shareholders are acting as nominees for the real shareholders. This is intended to make it harder to remain anonymous by hiding behind nominees.

New ‘failure to prevent fraud’ offence

A new ‘failure to prevent fraud’ offence is designed to stop companies benefitting from fraud committed by their officers or employees. The company will be held to account where specified fraud offences are committed by anyone in the company and where adequate fraud prevention measures were not in place. It will not be necessary for prosecutors to prove that the directors knew about it. This is aimed at producing a shift in corporate culture whereby bosses stop turning a blind eye to fraudulent activity within their companies.

Registered email and office addresses

Companies will have to supply a registered office address where Companies House can reliably contact them and expect a reply. PO boxes are banned. Companies will have to supply a statement that their registered office address is ‘appropriate’ in that correspondence sent to it would be expected to come to the attention of company officers. The company also has a duty to ensure that the delivery of documents there is capable of being recorded by the obtaining of an acknowledgement of delivery.

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A company email address will be required along similar lines to the office address: one where emails can be expected to be received and acknowledged by company representatives. Like much of the Act, how this will work in practice is in the process of being established.

Restrictions on corporate directors

Finally (there is more in the Act but we are talking about things that will most directly affect the day-to-day running of companies), existing restrictions on corporate directors will be brought into force. These are aimed at curbing the use of obscure chains of company ownership for economic crime. Under the new rules, only entities with ‘legal personality’ (registered incorporated limited companies) can be directors of other companies. Trusts and other non-incorporated entities cannot. This tightens up traceability of ownership and influence.

Furthermore, chains of faceless corporate directors will be curbed by a new rule. Company A can be a director of Company B, but only if all of Company A’s directors are natural persons and have had their identities verified. Company A must also be UK-registered.

This long-awaited partial ban on corporate directors and the other measures described in this article are intended to usher in a new era of corporate accountability. This legislation is a balancing act between imposing additional administrative burdens on companies and helping them to operate in a more transparent and crime-free corporate environment.

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